Move your investments to escape commission-paying share classes

Hundreds of thousands of investors who opted to buy funds directly from a fund manager - in many cases 20 years ago or more - are being left languishing in old-style commission-paying share classes.

Typically these direct investors are paying an ongoing charges figure (OCF) of 1.7 per cent on the funds they own. The clean (commission-free) share class normally costs half as much, on average 0.85 per cent.

For investors who choose to use a broker or platform, a separate broker fee is applied, but as a rule of thumb that fee plus the OCF will typically add up to between 1.1 and 1.3 per cent. Going down the direct route is therefore typically around a third more expensive.

But direct investors who ask their fund manager to switch them into clean share classes are unlikely to have their wishes granted, because there is no regulatory obligation for fund managers to move investors across to the cheaper clean share versions.


Platforms, on the other hand, had until April this year to move investors across to the clean share classes. They are no longer allowed to pocket ongoing trail commission from the manager, but instead must charge an explicit fee for their services.

For advisers it is more complicated. Commission payments are banned on new investment products bought since the start of 2013. For 'legacy business', financial advisers who use platforms have also had to move their clients over to the clean share classes.

This, however, only applies to Isas. And for those advisers who in the past (pre-2013) invested their client's money directly with a fund manager, the commission payments are still allowed.

How to find the best broker for your Isa

Mike Barrett from platform consultancy Lang Cat says that this may suit investors who still want to pay their adviser via commission.

'If you move to the clean share class this commission will end, and the adviser will probably suggest a move to a platform, so the question is whether the cost of paying for advice and the platform charge is offset by the reduced cost of the clean share classes. In almost all cases the cost will be similar,' says Barrett.

Self-directed investors, on the other hand, are simply paying more to the fund manager for non-existent advice.


Managers claim they face administrative costs and 'higher levels of service' for direct investments and are therefore justified in retaining the higher-paying share classes.

However, Money Observer is calling on fund managers to write to customers, explaining that they could move their money elsewhere and own the same fund more cheaply.

We would prefer managers to go further. We appreciate there is an administrative cost, but we think any charges levied should be reduced and made transparent.

Our campaign has been backed by respected industry figures, including Daniel Godfrey, the former chief executive of the Investment Association, Boring Money's Holly Mackay, Candid Money's Justin Modray, Damien Fahy, founder of website, and the Lang Cat.

In an early victory, one of the UK's biggest fund management groups is giving direct investors the chance to switch into the cheaper clean share classes. M&G has said it will switch the funds of investors who sign up to its upcoming new online service. The firm is writing to its 190,000 direct investors.

It says OCF for a typical M&G equity fund will fall to 1.16 per cent for all direct customers with at least £5,000 in their portfolios. In contrast, in commission-paying share classes the charge for the M&G Dividend fund, for example, is 1.66 per cent.

It is understood the Financial Conduct Authority's asset management market study, the results of which are expected early next year, will examine how investors can get value for money in asset management. The study will look closely at fund fees and charges.


For direct investors who hold investments with a fund management company, whether bought in person or via a financial adviser, one way to switch to clean share classes is to sell the holdings and then repurchase them via a platform.

But the problem with this approach is that for funds not held in an Isa, any move could trigger a capital gains tax (CGT) liability. The first £11,100 of annual gains are currently exempt from CGT.

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